UK spending cuts not even halfway there

IFS says 60% of government cuts are still to come. Is the recovery living on a prayer?

by Rachel Savage
Last Updated: 09 Jan 2015

The economy may be improving, but for how long? Only 40% of the government’s planned spending cuts will have taken place by the end of this financial year, the Institute for Fiscal Studies warned. Sobering.
 
That takes into account George Osborne’s plan to run a budget surplus by 2018-19 (the UK’s first since the millennium) by hacking at spending for an extra year, which was announced in last year’s Autumn Statement.
 
Additional cuts will be needed due to more planned spending, population growth and ageing Brits increasingly leaning on the NHS, the IFS said in its Green Budget. That’s on top of the £12bn a year already being slashed from social security.
 
‘Returning growth, and forecasts suggesting we should be running a Budget surplus by 2018-19, should not lull us into a false sense that all is now well with the public finances,’ IFS director Paul Johnson said sternly.
 
‘Analysis suggests that the economy has a significantly larger amount of spare capacity than the OBR [Office for Budget Responsibility] estimates,’ said Andrew Goodwin, a senior economist at Oxford Economics, which jointly produced the report. ‘The medicine of austerity could end up being applied in a dose higher than the patient actually needs.’
 
If Osborne does get to keep wielding his axe, national debt is still forecast to be 76% of the UK’s income in 2018-19. Paying the interest on that would cost about 4% of GDP, or more than the whole schools budget, the IFS said. We won’t get down to pre-crisis borrowing levels until the mid-2030s either, which is way too far away to even imagine right now.
 
The think-tank also warned of the ‘harder to quantify risks’ of increasingly relying on the richest 1% of taxpayers. It pointed out that the share of income tax paid by those 300,000 people had risen from 11% in 1979 to 27.5% in 2011–12, an eye-watering 7.5% of all tax revenue.
 
The poorest won’t be helped much by raising the personal allowance on income tax and ‘tinkering’ with business rates was making things more uncertain and complicated, the IFS grumbled as well (although small firms would argue that 'tinkering' will actually help them rather a lot).
 
It wasn’t all doom and gloom from the think-tank, though. It forecasted positively glowing economic growth of 2.6% for this year, above the 2.4% Office for National Statistics estimate, and said growth would be ‘more balanced’ than in 2013.
 
Property watchers (aka 'most of us'…) may also be surprised to hear that the IFS doesn’t think there’s a housing bubble – pointing out prices are still 25% below their pre-crisis peak in real terms. It’s even 17% shy of that high in soaring London, although the proportion of income being forked out by first-time-buyers is back to 2007 levels. So that’s at least one thing George Osborne and his Help to Buy cheerleaders can crow about…

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